The Wall Street and London City Masters of the Universe thought they were "Smarter than Gravity." They were not. Now it is economics for the rest of us.

Total Pageviews

Wednesday, March 27, 2013

Canada Plans for its own Cyprus Scenario

Savers around the
world have been watching the Cyprus scenario unfold as depositors money is
quite suddenly up in the air. Canadian savers may want to know that the government there is making its own plans for a Cyprus style scenario.Talk about a Canadian Economic Action Plan!

Canadian Government Action Plan Logo

In the event that a
“to big to fail” bank were to approach collapse in Canada, it would appear that
the money deposited in the banks could be taken and then used to keep the bank
viable.The following words can be found
on pages 144 and 145 of Jobs Growth and Long Term Prosperity – Economic Action
Plan 2012 as tabled in the House of Commons by the Hon. James Flaherty, Minister of Finance
on 21 March 2013.This is otherwise
known as the budget.

Systemically important banks will continue to
be subject to existing risk management requirements, including enhanced
supervision and recovery and resolution plans.

The Government proposes to implement a bail-in
regime for systemically important banks. This regime will be designed to ensure
that, in the unlikely event that a systemically important bank depletes its
capital, the bank can be recapitalized and returned to viability through the
very rapid conversion of certain bank liabilities into regulatory capital.
This will reduce risks for taxpayers. The Government will consult stakeholders
on how best to implement a bail-in regime in Canada. Implementation time lines
will allow for a smooth transition for affected institutions, investors and
other market participants.

Before drawing conclusions,
what do these words say?

First – “systemically
important banks”. This means banks that are perceived as being too-big-to-fail
(TBTF). The Office of the Superintendent of
Financial Institutions (OFSI) identified six banks in Canada as being
systemically important within the last week.They are the Royal Bank of Canada, the Toronto-Dominion Bank, the Bank of Nova Scotia, the Bank of Montreal,
the Canadian Imperial Bank of Commerce and the National Bank of Canada. This
was a bit of a surprise to some observers, as it had been thought that only the
RBC was TBTF.

Second – there is
discussion ofa “bail-in regime.”You should start getting nervous here.A bail out is when an outsider gives the institution
in trouble more money so it can keep going. A bail-in is when money from within
the institution is used for the bail out and then those whose money was taken
are given something in return.Typically, those who have their money taken are offered shares in the
institution in the hope that the institution will prosper again in the future
and the shareholders can still have value. This was just done over the last few
years in Spain. It did not work out too well.See http://tinyurl.com/c9ds5b9.

Third – we see the
words in the unlikely event that a
systemically important bank depletes its capital.In
other words, if a bank suddenly goes broke.This could be due to unforeseen loses such as a complex derivative
contract that failed.See a simple
explanation of derivatives at http://tinyurl.com/blhtc3q

Fourth – there is the
phrase the very rapid conversion of
certain bank liabilities into regulatory capital.The words “certain bank liabilities” is a
fancy way of saying deposits. When you deposit a hundred dollars in a bank,
this shows up on their spread sheet as a liability.So what this phrase says is that bank
deposits could be taken up and used by the bank and it could be converted into
regulatory capital.Regulatory capital
is another way of saying banks must keep a certain amount of money on hand for
meeting daily requirements such as withdrawals for deposits. The minimum amount
that must be kept on hand is determined by the regulator. In this case the regulator is OFSI.

So what does this all
mean?

In short, it says that
if a Canadian bank suddenly finds itself in financial trouble, money from depositors can
be takenin a “bail in” and used to keep
the bank solvent.Those who had their
money taken would be given shares in the bank or some other form of compensation
such as bonds.

Should you be worried?

The document does not
say so, but in such desperate circumstances, it might be assumed that the
deposits taken would be those that have more than $100,000.Account below $100,000 dollars are
guaranteed by the Canadian Deposit Insurance Corporation. So, small account
holders should be OK.

Canada is not alone in doing this. The UK and
the USA have a similar plan they discussed in December of 2012.See http://tiny.cc/z4jcuw

This is economics for the rest of us! Enjoy the ride in the new economy.

4 comments:

Banks have been converting liabilities, i e deposit moneys into assets, i e taking them in fees and other legally sanctioned schemes for hundreds of years. In fact that is how banks operate. Europeans have seen bank saving consistently raided in this fashion. In Canada and the US we do it differently: we make certain that the value of money constantly erodes (Check out the CPI to find out what a Nixon era dollar is worth today and plan to be shocked). Today banks contribute to dollar value erosion most effectively by creating and trading in instruments like default credit swops which are entirely artificial assets which no actual underlying value and when caught short, as they notoriously were four years ago, demanding the shortfall be made up by the likes of AIG who in turn look to the federal governments to provide quantitive easing, another was of saying pay he bill. The only way the feds can do that is by printing more money. Which is what they have done.

Hmmm, tough question. Not sure in Canada - have seen no plans here. I cannot say for sure, but I think such an idea would be the death knell for the stock market. The powers that be in various central banks and finance ministries are almost always fanatically committed to keeping stock markets at high levels. This is part of the reason we see the US Fed carrying on with its money printing or QE programs. A such, I cannot see then going after a portion of stock market shares. :-)

About Me

Hi there! We here at the Honest Banker do not have PhDs in Economics like Ben Bernanke over at the US Federal Reserve. Nor do we have Harvard degrees like Governor Mark Carney of the Bank of Canada/Bank of England. We are not quants with math degrees. What we do have is practical education and honest experience. We contribute to the real world economy while trying to figure out how to survive and build value in our lives and our communities under the current economic model. This model has been dictated to us by economists and politicians using many of the same seriously failed economic models that gave us the financial collapse of 2007 and 2008.
This is “economics for the rest of us” who live in the real world and are trying to figure out how to survive in it despite what the financial sector is doing to us.